U.S. service firms grew more slowly in January

WASHINGTON – Growth at U.S. service companies slowed slightly in January behind weaker new orders and business activity. But hiring improved, a bright sign for the economy.

The Institute for Supply Management said Tuesday that its index of non-manufacturing activity dipped to 55.2 in January. That's down from 55.7 in December, which was the highest level in nearly a year. Any reading above 50 indicates expansion.

The modest decline from December's strong reading suggests the industry was not greatly hampered by an increase in Social Security taxes that reduced take-home pay for most Americans.

Companies didn't single out the rise in payroll taxes in the survey, Anthony Nieves, chair of the ISM's survey committee, said during a conference call with reporters.

The report measures growth in industries that cover 90 percent of the work force, including retail, construction, health care and financial services.

Overall, economists were encouraged by the steady reading in the services index, as well as a sharp jump in the Institute's January manufacturing index released last week. The reports suggest economic growth is rebounding the January-March quarter after shrinking in the October-December quarter.

A gauge of hiring in the services report rose to its highest level in nearly seven years. That's consistent with the solid job gains reported by retailers, construction companies and other service firms in the government's January employment report, released last week.

Service firms and construction companies have added an average of nearly 195,000 jobs per month in the past three months. The increase in the employment gauge suggests the solid hiring will continue.

Paul Dales, an economist at Capital Economics, blamed the dip in the overall index on the Social Security tax increase.

"But this blow has been small and cushioned by stronger demand in other sectors, namely construction," he said.

Last month Congress and the White House reached a deal to prevent income taxes from rising on most Americans.

The agreement did not extend a temporary cut in Social Security taxes, which expired on Jan. 1. The two percentage point increase means a person earning $50,000 a year will have about $1,000 less to spend in 2013. A household with two high-paid workers will have up to $4,500 less.

Most economists expect the tax increase could trim the economy's growth by about one-half a percentage point this year.

Consumers spent more in December, according to a government report last week, though the increase was slower than in November. Consumer spending drives about 70 percent of the economy.

There have been other signs that Americans have been willing to open their wallets. Consumer spending rose 2.2 percent in the October-December quarter, up from 1.6 percent in the previous quarter.

That wasn't enough to bolster the economy, which contracted in the fourth quarter for the first time in 3 ½ years. But the weakness resulted from one-time factors, such as a sharp drop in company stockpiles and a steep fall in defense spending.

The ISM reported last week that its separate index for manufacturing surged on faster growth in new orders and hiring. The index rose to its highest level since April.

Service companies have been a key source of job growth this year. They have created about 90 percent of the net jobs added since January. Still, many of the new service jobs have been low-paying retail and restaurant positions.